The U.S. Supreme Court reversed the U.S. Court of Appeals for the Federal Circuit in a unanimous opinion in Medtronic, Inc. v. Mirowski Family Ventures, LLC, No. 12-1128, on January 22, 2014, holding that patent owners bear the burden of proving infringement when a licensee seeks a declaratory judgment that it is not infringing. Patent owners should consider whether there are provisions to deter potential challenges by licensees when negotiating the terms of a license.

This case originated from a license agreement between Mirowski Family Ventures and Eli Lilly & Co. for patents relating to implantable heart stimulators. Eli Lilly & Co. then sublicensed the patents to Medtronic. The license provided that if Mirowski gave notice to Medtronic that a product infringed one of the licensed patents, Medtronic could cure the non-payment of royalties or pay royalties while challenging the assertion of infringement through a declaratory judgment action. The license was later amended such that Medtronic could accumulate disputed royalties in an escrow account during any such challenge.

Medtronic initiated this case after Mirowski notified Medtronic that certain new products infringed the licensed patents. The district court concluded that Mirowski, as the party asserting infringement, bore the burden of proving infringement. The Federal Circuit reached the opposite conclusion, acknowledging that although normally the patent owner bears the burden of proving infringement, a different rule applies where the patent owner is a declaratory judgment defendant and foreclosed from asserting a counterclaim of infringement by the continued existence of the license.

The Supreme Court granted certiorari on the question of “whether, in such a declaratory judgment action brought by a licensee under MedImmune, the licensee has the burden to prove that its products do not infringe the patent, or whether (as is the case in all other patent litigation, including other declaratory judgment actions) the patentee must prove infringement.”

The Supreme Court based its decision on “three settled legal propositions”: (1) a patent owner ordinarily bears the burden of proving infringement; (2) the Declaratory Judgment Act is only procedural and leaves substantive rights unchanged; and (3) the burden of proof is a substantive aspect of a claim. Taken together, the Supreme Court concluded that a licensee’s filing of a declaratory judgment action does not shift the burden of proving infringement.

The Supreme Court also noted that three practical considerations led to the same conclusion. The Supreme Court explained that shifting the burden depending upon the form of action would: (1) create post-litigation uncertainty about the scope of the patent; (2) create unnecessary complexity by making it difficult for a licensee to understand the theory upon which the patent owner’s infringement claim rests; and (3) be difficult to reconcile with a basic purpose of the Declaratory Judgment Act to ameliorate the dilemma of a licensee challenging a patent’s scope – the choice between abandoning rights or risking suit.

The Supreme Court’s unanimous decision is consistent with its long-standing position that the public interest favors maintaining a well-balanced patent system that restricts the monopolies of patent owners to “their legitimate scope.” This decision, the Supreme Court’s earlier decision in MedImmune v. Genentech, 549 U.S. 118 (2007) (holding that licensees need not repudiate their license before challenging patent validity), and the Supreme Court’s denial of a petition for a writ of certiorari from the Second Circuit’s decision in Rates Technology v. Speakeasy, Inc., 685 F.3d 163 (2d Cir. 2012) (holding that a “no challenge” clause barring a licensee from challenging a patent’s validity is unenforceable, all serve as reminders that patent owners should be particularly mindful of potential disputes with the licensee while negotiating the license.

Although the enforceability of “no challenge” clauses and contractually shifting the burden of proof remain open questions, patent owners still can look to other contractual terms to deter a licensee from bringing such challenges. Provisions, such as increased royalty rates, options for termination of a license by the licensor in the event of a challenge by the licensee, or for well-defined alternative dispute resolution, could be sufficiently punitive to deter a licensee from bringing such challenges.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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